Introduction
Good morning. I am pleased to be back to testify before this
subcommittee. As was the case last time I appeared before you, my
subject today involves demonstration projects of the Health Care
Financing Administration (HCFA). Last time, the subject was
long-term care. Today, my testimony will focus on two projects
-- the Medicare Choices demonstration and the Competitive Pricing
demonstration -- central to our agenda of expanding managed care
choices available to Medicare beneficiaries while improving our
payment methodologies.
BACKGROUND
Over the past three decades, HCFNs use of its demonstration
authorities has had a profound impact on the evolution and
success of the Medicare and Medicaid programs. Through support,
development and testing of innovations in payment, delivery,
access and quality, HCFA has contributed significantly to major
program reforms and improvements. Let me just mention a few
examples.
As the result of a program of research and demonstrations
begun in 1976, Medicare moved in 1983 from cost-based
reimbursement for hospital care to a prospectively determined per
case payment based on diagnosis. The prospective payment system
saves billions of Medicare dollars annually while the Diagnostic
Related Group (DRG) classification system on which it is based is
used today by half of the State Medicaid programs, CHAMPUS, and
many private insurers, managed care plans, and other countries.
When the hospice movement was still in its infancy, HCFA
initiated a Medicare and Medicaid demonstration to determine
whether hospice could maximize patient autonomy during the last
weeks of life and allow terminally ill patients to die with as
much dignity as possible and relatively free of pain. Largely as
a result of this successful demonstration effort, legislation
established hospices as authorized Medicare providers. In 1994,
about 270,000 Medicare beneficiaries used hospice care.
Beginning in the mid-1970s, HCFA sponsored a series of
innovative Medicare and Medicaid demonstrations throughout the
country to test the use of community-based services as
substitutes for more costly institutional long-term care. These
demonstrations served as the framework for the legislation
authorizing the Medicaid waiver program under Section 1915(c) of
the Social Security Act, under which home and community-based
services may be covered.
HCFA's managed care programs were also rooted in extensive
demonstration efforts. Beginning in 1980, HCFA tested the use of
capitation payments for HMOs participating in Medicare. This
pioneering effort demonstrated to plans, Congress, and the
executive branch that HMO participation in Medicare on a
capitated basis made sense for both beneficiaries and the
program. Since HCFA implemented the Medicare managed care
program in 1985, both the number of beneficiaries enrolling in
risk plans and number of risk plans contracting with Medicare
have increased steadily. In 1985, only 309,000 beneficiaries
were enrolled in risk plans whereas today over 3.6 million are
enrolled in these plans, an increase of over ten-fold.
Similarly, in 1985, only 32 risk plans contracted with Medicare.
Today, 218 risk plans contract with Medicare.
There is general consensus among this Administration, the
Congress, managed care plans, beneficiary advocates, and other
providers that the Medicare managed care program should keep pace
with private sector innovations while still ensuring that
beneficiaries receive high quality care. For our purposes today,
let me cite three areas that receive frequent mention. First,
many believe that the types of managed care choices available to
beneficiaries should be expanded to provide as many options as
the commercial sector does. Within our current statutory
authority, HCFA has recently expanded beneficiaries' managed care
options to include a point-of-service option HMO. However,
making additional choices such as provider sponsored
organizations (PSOS) or preferred provider organizations (PPOS)
widely available to Medicare beneficiaries is not possible under
current law. Both the Administration and the Congress' balanced
budget proposals include provisions which would allow Medicare to
contract with these managed care organizations on a permanent
basis.
Second, there is agreement that beneficiaries need reliable,
comparative information on the managed care plans available in
their local market areas in order to make informed decisions
regarding enrollment. Again, there is common ground in the
Administration and Congressional proposals. Both plans would
require the Secretary of Health and Human Services to disseminate
comparative information on managed care options at initial
Medicare eligibility and during annual open enrollment periods.
The Administration's bill also requires that information on
Medigap plans be included in the comparative materials.
And third, most observers believe that the current payment
methodology for managed care plans is flawed and should be
improved. Under current law, the payment methodology is based on
the Adjusted Average Per Capita Cost (AAPCC), generally referred
to as "the AAPCC". Under the AAPCC methodology, payment levels
for HMOs are derived from the utilization and cost experience in
Medicare's fee-for-service population. There is general
agreement that Medicare's payments to managed care plans should
be "delinked" from fee-for-service costs in particular
localities. In addition, recent research by HCFA confirms
previous research findings that, because the current payment
methodology does not adequately take into account the better
health status of beneficiaries enrolled in Medicare HMOs, the
Medicare program pays more for these beneficiaries than it would
if they had remained in fee-for-service Medicare.
Congress has given HCFA broad demonstration authority to test
potential improvements with which to address concerns like these.
My testimony today will focus on two such demonstrations:
Medicare Choices and the Competitive Pricing demonstration.
MEDICARE CHOICES
The purpose of Medicare Choices is to test the receptivity of
Medicare beneficiaries to a broad range of managed care delivery
system options and to evaluate the suitability of these options
for the Medicare program. Our goal is to provide beneficiaries
with additional delivery system choices and to increase options
available to beneficiaries in rural areas. In addition, the
Medicare Choices demonstration will help to develop approaches to
a wide range of implementation issues- including payment methods,
certification requirements and quality monitoring systems--which
would be associated with some of the new Medicare managed care
choices piloted in this demonstration. In developing the design
specifications for Medicare Choices, HCFA and its contractor
consulted extensively with interested parties including managed
care plans.
In order to minimize unnecessary investment of resources by
applicants, HCFA used a two-step application process to select
the managed care plans participating in the Medicare Choices
demonstration. HCFA first asked plans to submit a
pre-application statement of interest and a brief project
description. After reviewing the pre-applications, HCFA then
requested selected organizations to submit more detailed
proposals.
During the pre-application process, HCFA encouraged a broad
range of managed care organizations, including PPOS, PSOs and
HMOs, to submit innovative managed care proposals, such as
point-of-service and primary care case management systems. We
also encouraged applicants to propose alternative payment
methodologies such as risk corridors and blended capitation
payments and to indicate a willingness to test risk adjustment
methods.
HCFA targeted nine cities as well as rural areas. The nine
target cities were Hartford, CT; Sacramento, CA; Jacksonville,
FL; Atlanta, GA; New Orleans, LA; Columbus, OH; Philadelphia, PA;
Louisville, KY; and Houston, TX. These sites represent areas
with high managed care penetration in the commercial sector but
low Medicare HMO penetration. We also accepted innovative pre-
applications from interested organizations outside these target
areas. We received 372 pre-applications, representing nearly
every State in the nation.
From these 372 pre-applications, HCFA selected 52 managed
care plans for further consideration; we requested these plans to
submit final applications to HCFA by December 15, 1995. Plans
invited to submit final applications offered a wide range of
managed care delivery models and proposed a variety of payment
methodologies.
We selected "award candidates" based on geographic factors,
innovation of design, and ability to meet eligibility
requirements. We selected 25 award candidates for final
consideration -- nine PSOS, eight provider-owned HMOs or
providers with HMO partners, eight HMOs or other managed care
organizations.
The 25 award candidates submitted a variety of payment
proposals -- thirteen requested 95% of the AAPCC, five requested
risk corridors around the AAPCC, seven requested other payment
models such as partial capitation, blended payments, or capped
fee-for-service payments. Sixteen of the 25 indicated an
interest in testing a risk adjustment method. Five of the 25
award candidates are located in rural areas.
Award candidates are currently in the final steps of the
Medicare Choices demonstration award process, which includes
negotiations regarding payment methodology. Once these remaining
details are worked out, HCFA will review plans to determine
whether they meet standards regarding access, beneficiary
protections, financial solvency, and quality assurance. While
generally expecting plans to meet current law standards for
Medicare HMOs, HCFA will evaluate plans participating in the
Medicare Choices demonstration on a case-by-case basis.
HCFA expects plans to be certified and ready to enroll
beneficiaries in 1997, but some may be ready to enroll
beneficiaries sooner.
Both the Administration and the Congress support expanding
Medicare managed care choices to include PPOs and PSOs and
support similar provisions regarding PSO State licensing,
solvency, and quality requirements. In the past, demonstrations
have provided valuable information on implementing such program
expansions. If HCFA is authorized in the future to contract with
PPOs and PSOs on a permanent basis, the lessons learned from the
Medicare Choices demonstration will significantly facilitate and
accelerate implementation.
COMPETITIVE PRICING DEMONSTRATION
As I mentioned earlier, the current payment methodology for
managed care plans is flawed and should be improved. For years,
health care financing experts encouraged Medicare to move from
our fee-for-service based method to one that relies more on a
"market- based" payment rate. The managed care industry appeared
to agree as well. The Group Health Association of America (now
the American Association of Health Plans) testified before this
Subcommittee in February 1995 that "payment rates are tied to the
Medicare fee-for- service costs in a given area, and do not give
the Medicare program the benefits of market dynamics present in
the private sector." GHAA further stated that "Medicare payments
to health plans should eventually be 'market-based'. " In its
1995 Annual Report to Congress, the Physician Payment Review
Commission (PPRC) recommended that "payment rates for Medicare
health maintenance organizations established through competitive
bidding ultimately should replace payment rates based on adjusted
average per capita costs in markets with a sufficient number of
HMOs bidding to achieve price competition." However,
developing a market-based rate is a complex endeavor and the best
methodologies are not immediately obvious. Recognizing both the
need to seriously examine market-based rate setting and the
intricacy of the task, about two years ago HCFA began to invest
significant resources in developing a demonstration which we
refer to as "competitive pricing."
HCFA conferred with many experts when designing the
demonstration's bidding process, including consultants at Abt
Associates, a firm with a long history in health care financing
policy; academics recognized as authorities on competitive
pricing at the University of Minnesota; additional consultants
with expertise in managed care,'and other technical experts,
including representatives of the managed care industry and the
beneficiary population.
In developing the education and enrollment aspects of the
demonstration, we worked with BENOVA (formerly knows as "Health
Choice"), a contractor specializing in marketing and consumer
education in the private and public sectors. We also convened
two expert panels specifically to help develop the education and
enrollment design specifications, one comprised of managed care
plans and the other of beneficiary-oriented representatives. In
addition, another contractor, Research Triangle Institute,
conducted numerous focus groups in several states to determine
beneficiaries' preferred methods of receiving information on
health insurance options and their response to prototype
educational materials. We also conducted 35 individual
interviews with Medicare beneficiaries in four locations to more
carefully examine their reactions to the prototype educational
materials and to determine whether beneficiaries understood the
most important elements included in these materials.
Components of the Demonstration
The competitive pricing demonstration focuses on two of the
three concerns outlined in my introduction: altering the payment
methodology for Medicare managed care plans and improving the
ability of beneficiaries to make informed choices about their
Medicare options. The demonstration has three essential and
interrelated components: beneficiary education, third party
enrollment and counseling, and market-based rate setting.
Beneficiary Education. HCFA will contract with an
independent third party to prepare and distribute a comprehensive
set of brochures to all Medicare beneficiaries in a specific
market explaining the features of Medicare fee-for-service and
managed care programs. The printed materials will highlight
issues to consider when choosing between these two delivery
systems. The materials will also include a chart comparing the
benefit packages and premiums for all Medicare managed care plans
in the beneficiaries! local market area in addition to
comparisons of Medigap options. It will also include a list of
HCFA-sponsored education seminars and informational videos and
the number of a toll free counseling call center. The materials
will not advocate managed care or fee-for-service Medicare. The
materials will clearly state that the beneficiary does not need
to take any action and are intended only to provide information.
Third Party Enrollment and Counseling. The independent third
party contractor will also conduct all HMO enrollment and
disenrollment activities and staff the toll free counseling call
center. This neutral third party will provide objective
information to Medicare beneficiaries who call seeking more
information on their Medicare choices, as well as enroll
beneficiaries who want to choose a managed care plan by mail or
by telephone. In the competitive environment of this
demonstration, managed care enrollment through a neutral
third-party will help to ensure that plans do not encourage
healthier beneficiaries to enroll and discourage sicker
beneficiaries from enrolling in their plan. In addition, while
we believe that favorable selection into Medicare BA40s results
in part from beneficiary self-selection, we are interested in
learning if using a neutral third party has an effect on
favorable selection into Medicare HMOs.
Another reason third party enrollment is an important part of
this project is that HCFA's recent focus groups have found that
Medicare beneficiaries would prefer having access to a third
party (as opposed to a plan trying to "sell them something") when
learning about and/or making managed care choices.
Several years ago, HCFA successfully piloted a beneficiary
education and third party enrollment program in Portland, Oregon.
In fact, some of the Oregon plans continued to contract with this
third party after the demonstration ended. Third party enrollment
is a mechanism used by many public and private sector purchasers,
such as 22 State Medicaid programs, the CALPERS program which
covers over I million California state and local government
employees, and many large employers.
Market-Based Rate Setting. Under this demonstration,
Medicare's payment rate will be based on bids submitted by all
Medicare managed care plans in the demonstration site. Plans
would bid on a "community standard" benefit package, representing
the most common plan offered in the area. The rate derived from
bids will replace the current AAPCC rate. The same demographic
factors now applied to the AAPCC (age, sex, Medicaid, and
institutional status) will be applied to this market-based rate
to adjust payment to establish the payment rate for individual
beneficiaries in the first year of the demonstration. HCFA plans
to apply new risk adjustment methodologies after the first year.
We have not determined yet precisely how we will set the
Medicare payment based on submitted bids. We are committed to
assuring that beneficiaries have access to more than one plan at
the current premium level. For example, if most or all of the
plans in the demonstration site are currently offering a "zero"
premium option, we would set the Medicare payment rate so that
several plans could continue to offer such an option.
Site Selection
In determining potential demonstration sites, we targeted
those areas with a relatively high AAPCC rate, relatively low
Medicare managed care penetration, and enough Medicare HMOs to
make competition feasible. We are confident that we have been
thorough and careful in gathering together the resources
appropriate to design the demonstration. However, we also
realize that we made a important mistake after we identified
Baltimore as the most appropriate initial site for this
demonstration. We did not adequately consult with interested
parties at the local level.
Under Mr. Cardin's leadership, HCFA is now in the midst of a
series of meetings, chaired by the Congressman, with others from
the Maryland Congressional delegation, Baltimore managed care
plans, beneficiary representatives, Baltimore business
representatives, and representatives of the State government.
The purpose of these meetings is to discuss the issues and
concerns raised by these parties, something we should have done
earlier, but are glad to be doing now.
I'd like to take this opportunity to thank Mr. Cardin for his
positive and constructive action after Baltimore was announced as
the first potential demonstration site and to reiterate Secretary
Shalala's commitment that we will not proceed with the
demonstration until members of the Maryland delegation are
comfortable with the demonstration's design and timetable.
Clarification of Demonstration's Parameters
The design and implementation of this demonstration is a
complex undertaking and, hence, there are many areas where
misunderstandings can occur. While it would not be possible to
cover all areas, I would like clarify some of the demonstration's
parameters.
First, no plan would be excluded on the basis of its
submitted bid. The purpose of the bidding process is simply to
set the Medicare payment amount on the basis of the managed care
marketplace, rather than using the AAPCC rate. Indeed, the use of
the phrase "competitive pricing" in lieu of "competitive bidding"
is intended to convey that we are only setting the price, not
using the bidding process to exclude any interested parties.
Second, beneficiaries will have the option of remaining in
fee- for-service Medicare or enrolling in a managed care plan.
No action on the beneficiary's part is required to stay in
fee-for-service Medicare. The beneficiary's enrollment in a
managed care plan will be completely voluntary. The contractor
conducting third party enrollment will not be rated or
compensated based on the number of beneficiaries enrolling in a
managed care plan. The purpose of the education and information
is to assure that beneficiaries understand all their options.
Third, managed care plans will be able to market to potential
enrollees as they do today through mailings and radio, newspaper,
and television advertisements. Their ability to deliver their
message to potential enrollees will not be hampered. This
demonstration simply provides comparative information on plan
choices so that beneficiaries will be able to make informed
choices and conducts enrollment and disenrollment through a
neutral party, instead of through the plans.
Finally, the managed care industry has for many years
expressed an interest in experimenting with a metropolitan
statistical area (MSA) wide rate, and we had indicated that we
would consider using one MSA-wide payment rate. However,
concerns have been raised that this could discourage plans from
providing services to individuals in Baltimore City, which has
the highest county-specific rate in the region. We have
indicated that we are flexible on whether to use one rate for the
Baltimore MSA or to adjust the bid for county differences.
CONCLUSION
Mr. Chairman, you and I and many witnesses before your
Subcommittee have expressed our belief that Medicare needs to
learn from the private sector by expanding the range of managed
care choices available to our beneficiaries, giving beneficiaries
the information they need to make informed choices, and reforming
how Medicare determines its payment rate to managed care plans to
incorporate local market forces. But these are complex problems
and no one knows the right solutions at this time. Fortunately,
our demonstration authorities allow us to test how to make these
important and needed changes. We believe we have worked
responsibly with experts and affected parties to craft
demonstrations that will allow us to move Medicare into the 21st
century.
I would be happy to answer any questions you may have.
